Cost, Price, Value

8 03 2010

Cost, price and value are often used interchangeably but they have distinct meanings:

  • Cost: the cost of your product/service is the effort/amount you spent to produce it
  • Price: is the financial reward for providing the product/service
  • Value: is defined from the customers sight of view and represents their appraisal of                   the worth of the product/service for him/her

These definitions get sharper by viewing on an example:

The cost for a plumber to fix a water-mains burst at a customer’s home may be 15€ for travel, materials costing 5€ and an hour’s labour at 20€. But however, the value of the service to the customer – who may has water leaking all over his/her house – is far greater than the 40€ cost, so the plumber may decide to charge a total of 85€.

So you see the amount of price is not directly related to it’s cost, but in order to make profit there should be a                  Δ(price-cost) < 0.

To increase the aggregated profit the selling person has to find a price which has a great enough Δ to the cost but not a too big one, because then nobody will buy the product.

Graphic origin: http://www.goldratt-toc.com/gtl01/uploads/241/MarketPrice.png

References: http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073790695

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3 responses

18 10 2013
Joel

Nice info. Thank you.

25 08 2015
ade

very rich…straight to the point and well thought out.

17 12 2015
Red Wine Please

Interesting that both parties withhold information from the other. Matter of fact, it’s required unless you expect the seller to give you the product or service at cost or the buyer to buy at the highest price he is willing to give.

During an exchange, the exchange price reflects the following:
Price >= Minimum price the Seller is willing to accept
Price <= Maximum price the Buyer is willing to accept

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